Denis Ouellet's  Instablog

 US personal income and outlays for September were released last week and they don’t lead to any cheering for the coming all-important Thanksgiving and Christmas seasons. The next 6 weeks are crucial for the US economy since all the green shoots stemming from the inventory restocking scenario will likely die if they do not get fertilized by higher consumer spending during the most important period of the year.

If retail sales remain weak, corporate America will scramble to keep inventories and costs as low as possible into the new year and the double-dip scenario will gain traction. In a Barron’s survey of leading money managers, 52% gave zero probability to a double dip in the economy, only 31% giving it better than 50% odds.

Personal disposable income has been flat at best since April and only a decline in the savings rate during the summer months has saved the economy. Yes, when all economists were expecting higher savings, the US consumer went the other way and dipped into his savings to take advantage of the cash-for-clunker and the first-time home buyers tax credit. Americans know a bargain when they see one.

The problem is that these one-offs have more than likely taken all available ammos from consumers’ pockets at a time when

• employment keeps declining,
• people who can keep their jobs work fewer and fewer hours,
• salary rates erode,
• government transfers have peaked
• personal tax rates have bottomed
• and credit availability is very limited.

US wages and salaries income have declined nearly 5.4% since August 2008 and have shown no signs of turning up yet.

Transfer receipts are rising at a slower rate.

 

Government stimuli now can barely hold personal disposable income steady.

Consumers dipped into their savings to benefit from perceived bargains…

…which boosted expenditures during the summer…

…likely at the expense of winter spending. Consumer expenditures rose some $200 billion since April, only because government transfers rose $78B and personal savings declined $130B. During the summer months, expenditures rose $93B thanks to a $30B increase in transfers and a $76B drop in savings.

The hope for the economy is that US consumers dip further into their savings to sustain consumption over the shorter term in the expectation that the labor market will turn up soon.

When most economists were predicting a fairly significant increase in the savings rate, it now stand at 3.3%, high based on recent standards but very low compared to the pre-2000 levels. So much for the “new normal” era!

What to expect for the Christmas season? Last year, scared consumers retrenched, driving their savings from 1.7% of PDI in August to 4.7% in December, cutting their spending by $323 Billion to $9.9 trillion in December.

Wages and salary income is currently $291B lower than last December and while transfer receipts are $233B higher, total pretax income is $234B lower. This big gap in income has thankfully been offset by reduced income taxes, leaving PDI $107B higher.

With the current state of the labor market, consumer spending could rise 1% YoY in December (flattish QoQ) but a 1% rise in the savings rate to the 4.0-4.5% range would kill the season and likely bring about the double dip.

When your economic outlook rests essentially on the behavior of the elusive savings rate…
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no positions

 Year-old trends continue:

• SSS remain generally weak, more so at high end retailers (left end side on the chart) while discounters (right end side) outperform.
• September SSS were less bad for all retailers with negative sales trends and better for others. Obviously, as year-ago comps began to worsen at mid-year and got increasingly bad throughout the second half, comparisons have to improve. SSS turned quite weak for most retailers in September 2008.The fact that results beat analysts estimates only prove that analysts are not great in predicting monthly sales patterns (who is?).
• For example, GAP and JC Penney are showing much improved trends in September but their SSS were down 11.0% and 12.4% respectively in September 2008.
• At the opposite, BJs’ 5.5% sales gain this year is excellent given that it is against a 10.4% jump in September 2008.
• Also noteworthy: Aeropostale keeps it up! TJX maintains a strong sales momentum.

Disclosure: no positions

If charts do not come out well, go to http://www.news-to-use.com/2009/09/north-american-european-bank-rankings.html

Follow-up on my May 14 initial post NORTH AMERICAN AND EUROPEAN BANK RANKINGS. I excluded Goldman Sachs and Morgan Stanley because their bank status is so recent. All data is translated in US$ based on May 14 exchange rates. To facilitate reading the charts, US banks are in blue, Canadian banks in red and European banks in yellow.

MARKET CAPITALIZATIONS

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 I just published my latest analysis of equity market valuation.

The S&P 500 Index is overvalued on the basis of the $40.00 trailing earnings but this takes no account of the fact that Q408 losses continue to deflate trailing earnings. 

Q209 earnings were about $14.00, an annualized level of $56. On that basis, equities are more attractive.

Disclosure: no position.

For those willing to use forecast earnings, equities are quite attractive with 17-25% upside.

The report debates the pros and the cons, concluding that, unlike last March when valuation levels were factually attractive, current valuation levels are not quite as compelling.

See the full report on my blog at www.news-to-use.com/2009/08/equity-valua...

The resiliency of consumer spending so far in 2009 is rather fortunate since it accounts for some 70% of US GDP. Furthermore, it has significantly contributed to many recent observations of green shoots in the US. Importantly, it has most likely been a key factor in the spectacular change in investors sentiment since March, leading to much higher equity prices which themselves appear to be feeding the recent more upbeat consumer surveys.

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(Note, if the charts do not show well, go to http://www.news-to-use...

Not a big surprise but nevertheless disheartening sales trends for many retailers.

May yoy sales changes were generally worse than April (which had Easter this year).

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